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A lien is a security interest that is placed on property to secure the payment of a debt or other obligation. Many people have liens on their houses. When the housing market worsens and the value of the home goes down, many junior mortgages (those that are granted subsequently) remain unsecured. Put simply, some liens are prioritized against others. This depends on when each lien was recorded. Those that are recorded first take priority over those recorded subsequently. But can you ever eliminate the more junior liens first?
Lien stripping, which can occur during Chapter 13 bankruptcy, is the process of eliminating these junior liens by allowing the individual filing for bankruptcy, who is “upside down,” to wipe out those that are completely unsecured. Someone is considered upside down on their property if their mortgage becomes greater than the fair market value of the property. It’s important to note that lien stripping cannot occur in Chapter 7 bankruptcy.
The “Mechanics” of Lien Stripping
To recap, you are allowed to strip a junior lien so long as the amount of the senior lien is greater than the fair market value of the home. For instance, imagine that your house is worth $425,000. Your first mortgage is worth $350,000, your second mortgage is worth $100,000, and your third is worth $50,000. Because your first and second mortgages (totaling $450,000) fully meet the home’s value ($425,000), they leave the third mortgage unsecured. Therefore, you may be able to strip (remove) the third lien in bankruptcy.
Now let’s imagine the same scenario except that your house is worth $475,000. Since the first two mortgages (totaling $450,000) don’t fully secure the value of the home, the third mortgage would be partially secured and therefore could not be stripped.
Converting Liens to an Unsecured Debt
In the event that you claim your junior mortgage is fully unsecured, the mortgage holder may object to and challenge the appraisal of your house concerning the fair market value. In such a case, the court may hold a hearing at which your appraiser is required to testify.
You can think of it this way: stripping a lien converts a junior mortgage that isn’t fully secured into an unsecured debt or non-priority debt that is not secured by collateral. While you might have to pay part of the unsecured debt through the Chapter 13 case, that amount could be small compared to what is actually owed. A stripped junior mortgage is considered discharged.
Toronjo & Prosser Law Helps Those Who Are Dealing with Bankruptcy
It’s undoubtedly stressful to realize that you don’t have enough money, and even more stressful when you realize that filing for bankruptcy may be your best option. That’s why it’s so important to consult with a knowledgeable and experienced Dallas bankruptcy attorney. At Toronjo & Prosser, our qualified Texas Bankruptcy Attorneys can help you to navigate the process. To learn more or to schedule a free consultation contact us online or call us today!